China stakes claim to S. Texas oil, gas

CNOOC's deal with Chesapeake Energy is the largest purchase of an interest in U.S. energy assets by a Chinese company. Chinese investment will boost South Texas drilling Slideshow: China's hunger for energy

By Monica Hatcher :
October 12, 2010

Mike Whitwell, owns a 3,100-acre ranch and leases 11,000 acres near Cotulla where he runs cattle, is waiting for drilling to start on his property. He said CNOOC's entrance into the Eagle Ford oil and gas formation could give younger generations a reason not to move away.

HOUSTON - State-owned Chinese energy giant CNOOC is buying a multibillion-dollar stake in 600,000 acres of South Texas oil and gas fields, potentially testing the political waters for further expansion into U.S. energy reserves.

With the announcement Monday that it would pay up to $2.2 billion for a one-third stake in Chesapeake Energy assets, CNOOC lays claim to a share of properties that eventually could produce up to half a million barrels a day of oil equivalent.

It also might pick up some American know-how about tapping the hard-to-get deposits trapped in dense shale rock formations, analysts said.

As part of the deal, the largest purchase of an interest in U.S. energy assets by a Chinese company, CNOOC has agreed to pay about $1.1 billion for a chunk of Chesapeake's assets in the Eagle Ford, a broad oil and gas formation that runs largely from southwest of San Antonio to the Mexican border.

CNOOC also will provide up to $1.1 billion more to cover drilling costs.

The deal represents China's second try at making a big move into the U.S. oil and gas market, following a failed bid five years ago to buy California-based Unocal Corp.

Intense political opposition over energy security concerns derailed that $18.4 billion deal. But analysts expect few political or regulatory hurdles to the CNOOC-Chesapeake deal.

"The climate is much more hospitable now," said Juli MacDonald-Wimbush, a partner with Marstel-Day, an energy and environmental security consulting company in Fredericksburg, Va.

"They have the cash, and energy companies in the U.S. are looking for the cash to develop these reserves," MacDonald-Wimbush said.

Aubrey McClendon, CEO of Oklahoma City-based Chesapeake, said he has not heard objections to the sale.

Unlike China's Unocal bid, the latest deal doesn't involve technology transfers or a direct investment in Chesapeake, he said, and CNOOC employees won't work for Chesapeake, which will continue to operate the project.

"This is a pretty simple business transaction," McClendon said. "The initial feedback we're getting is that this is something the government should be very happy to see, which is the return of American capital into our country so that we can use it to create high-paying American jobs and also reduce oil imports a few years down the road."

He projected that the sale would create as many as 20,000 jobs, directly and indirectly, and, on CNOOC's dime, allow the company to increase its rig count in South Texas from 10 rigs to about 40 by the end of 2012.

Analysts have suggested that much of CNOOC's interest is in gaining technical insight. Gas and oil locked in the nation's plentiful shale formations is abundant but difficult to extract.

The deposits, known as unconventional plays, have attracted growing interest in recent years because of improved technology in hydraulic fracturing, which frees hydrocarbons by pumping fluid and sand into reservoirs to crack the rock.

Chesapeake, one of the nation's largest independent oil and gas companies, was an early mover in the shales, leasing up land aggressively this decade.

"From the Chinese perspective, this is a golden opportunity for them. They have identified shale resources in China, but they don't have the knowledge or technical expertise to go after those resources," said Ken Medlock, a fellow at Houston's Baker Institute and adjunct professor in Rice University's economics department.

McClendon disputed that notion, saying hydraulic fracturing is now "off-the-shelf technology" available to anyone.

Also underlying the move is China's need to find new energy sources and the technology to develop them to feed its expansive economic growth.

Energy consumption in the world's most populous nation has doubled in less than a decade, and the International Energy Agency reported in July that China surpassed the U.S. in total energy used in 2009.

China has increasingly been looking to the Americas for raw materials it needs to sustain the boom. As private investment dwindled with the global financial crisis, the cash-flush Chinese went on a regional shopping spree.

"It's really kind of exploded. All of a sudden, you've started to see a lot of large-scale purchases," said Evan Ellis, an expert on China's involvement in the region who teaches at the Center for Hemispheric Defense Studies in Washington. "Basically Latin America is becoming a Pacific-oriented region."

China has poured some $20 billion in loans and direct investments into Brazil's offshore oil exploration and production, for example. And last spring, the Chinese government loaned $20 billion to Venezuela to develop oil fields in its Orinoco River basin, with much of the work awarded to Chinese companies.